Strong investment opportunities in Europe’s small and mid-sized sector have been overshadowed by structural and political challenges and weak economic growth, according to Baring Asset Management.
Negative sentiments towards Europe’s economic prospects have caused valuations in many cases to become very attractive, leading to clear opportunities for active investors taking a long-term view.
Nick Williams, manager of the Baring Europe Select Trust and head of small and mid-cap equities, said, “It is clear that there are significant concerns around growth in Europe, and investors are very right to be cautious. Core markets such as Italy and France remain firmly in the spotlight but a sustainable, broad economic recovery across the region remains unclear at the moment.”
Growth in Europe has lagged in recent months, as GDP stagnated in the second quarter of 2014. Inflation dropped well below the European Central Bank’s target of almost 2 per cent, amounting to just 0.4 per cent in July. The eurozone economy grew by only 0.15 per cent in the year to September 2014, and it’s been nearly 15 years since the continent saw GDP growth above 1 per cent.
Inflexible labour laws, poor demographics, a dysfunctional currency, over-reliance on welfare, decentralised banking and a bureaucratic political system have been identified as reasons for Europe’s stagnation.
Mr Williams continued, “However, the fact remains that Europe has a large number of dynamic, successful and growing companies, many of them global leaders in their fields. Recent volatility has ensured that Europe remains a ‘land of opportunity’ for stock pickers who can identify these well-priced, attractive opportunities. When sentiment is negative, we find that the number of opportunities to invest increases.”
Lower overall valuations present investment opportunities, but advisers must consider whether the underlying distortion of markets is creating more stock-picking opportunities.
Guy Foster, head of research at Brewin Dolphin, said, “European markets are distorted as competitiveness-enhancing policies reduce barriers to entry in some markets. To some extent the small and mid-cap companies are able to participate in previously restricted markets. Beware, however, the general drive towards more competition is generally one which will see supernormal profits earned by those with vested interests.
“Since the financial crisis we have seen large businesses focusing, which is improving the competitive environment for smaller operators in niche markets. Financing remains hugely advantageous to large firms which create a competitive headwind for small and mid-caps. The ECB’s current policy drive attempts to address this.”
